Introduction:
In recent years, cryptocurrencies have taken the financial world by storm. Spearheaded predominantly by Bitcoin, there’s been a phenomenal rise in the price of cryptocurrencies. Today, there are over a thousand cryptocurrencies in existence. Not just individuals, big firms and businesses are also getting into the cryptocurrency business. Tech giant Facebook proposed to launch a new global cryptocurrency called Libra. However, the rapid growth and use of cryptocurrencies does not come without risk
Recommendations:
Inter-Ministerial Committee on Virtual Currencies headed by finance secretary Subhash Chandra Garg has submitted its report to the government.
- Ban on all forms of private cryptocurrencies.
- Impose a fine of up to Rs 25 crore and imprisonment of as much as 10 years for anyone dealing in them.
- RBI and the government may look at the introduction of an official digital currency in the country.
- Establish a specific group by the department of economic affairs with participation by the RBI, department of financial services and the ministry of electronics and information technology (MeitY) for examining and developing an appropriate model of digital currency in India.
- The panel backed use of distributed ledger technology (DLT) or blockchain for selected areas. It has asked the department of economic affairs to take the necessary measures to facilitate the use of DLT in the financial field after identifying its uses.
- It has also suggested the use of DLT to reduce compliance costs for know-your-customer (KYC) requirements.
- Data localisation requirements proposed in the draft Data Protection Bill may need to be applied carefully, including with respect to the storage of critical personal data so as to ensure that there is no adverse impact on Indian firms and Indian consumers who may stand to benefit from DLT-based services.
Central Bank Digital Currency (CBDC):
- The IMC’s view is that it “would be advisable to have an open mind regarding the introduction of an official digital currency in India”.
- It noted that the RBI Act of 1934 has the enabling provisions to permit the central government to approve a “Central Bank Digital Currency” (CBDC) as legal tender in India.
Blockchain technology
- It is a specific kind of DLT that came to prominence after Bitcoin, a cryptocurrency that used it, became popular.
- Cryptocurrencies such as Bitcoin use codes to encrypt transactions and stack them up in blocks, creating Blockchains. It is the use of codes that differentiates cryptocurrencies from other virtual currencies.
Cryptocurrency:
- It is a digital or virtual currency that uses cryptography for security.
- Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank.
- They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders. The most common cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin.
- Facebook has announced a digital currency called Libra that will roll out for use in 2020 and allow the platform’s billions of users across the globe to make financial transactions online.
However, challenges remain:
- The government is wary that regulation will provide legitimacy to “what is currently ambiguous,” and may lead to further rise in its valuation and end up contributing “to the investment bubble”.
- A currency that is not based on any real economic activity, unlike a sovereign currency whose value is based on the relative value of a tradeable basket of goods and services, cannot prima facie inspire much comfort.
- Bitcoin’s value, astronomical even now at about $8,300 but much below January 2018’s stratospheric levels, is based on demand for a fixed supply of Bitcoins in the future it cannot exceed 21 million in number, of which 18 million has already been mined.
- Cryptos are feared not just for their sheer speculative propensities, but also for their capacity to undermine sovereign currencies (the latter is an exaggerated apprehension).
- Virtual currency is being traded anonymously over the Internet and used for a host of anti-national and illegal activities, from terror funding to illicit trade of arms and drugs and so on.
- The online use of this currency, was without any border restrictions or geographical constraints, resulting in danger to the integrity and sovereignty of the nation.
- However, it does not make sense to go overboard and criminalise merely adventurous crypto speculators. There are no official or other data available that point towards misuse of cryptocurrencies for illegal ends
